Steve Bainbridge .. explains why Sokol's trading could be taking a corporate opportunity and violate Sokol's duty of loyalty. Steve's analysis, as usual, is precise and I agree with what he says.
Thanks! Steve then goes on to observe, however, that:
In the usual corporate opportunity case, an insider who takes a corporate opportunity deprives the corporation of the opportunity. If, for example, an officer buys Blackacre, the corporation is unable to buy Blackacre. If the officer signs a contract to sell widgets to a customer, the corporation cannot sells its widgets to that customer.
That usually isn't true in the stock trading context. Sokol's purchases of Lubrizol stock did not deprive Berkshire of the opportunity to purchase Lubrizol stock, and, in fact, Berkshire did purchase Lubrizol stock. Has Sokol really "taken" a corporate opportunity if the opportunity is still there?
That's a very perceptive question. I think the answer is yes. Unfortunately, I am not aware of any case law directly on point. So I would fall back on the teaching of the seminal Guth v. Loft Inc., 5 A.2d 503 (Del. 1939):
Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests.
Sokol learned of the Lubrizol opportunity in his capacity as a Berkshire Hathaway fiduciary. The investment bank brought him the acquisition proposal precisely because he had Buffett's ear. He then used the information that had been entrusted to him for corporate purposes to make a private profit. Even if that's an unusual form of corporate opportunity case, it still reeks of self-dealing. Which should suffice, if one believes the Guth court meant it when it said:
The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest. The occasions for the determination of honesty, good faith and loyal conduct are many and varied, and no hard and fast rule can be formulated. The standard of loyalty is measured by no fixed scale. ...
The rule, referred to briefly as the rule of corporate opportunity, is merely one of the manifestations of the general rule that demands of an officer or director the utmost good faith in his relation to the corporation which he represents.
So the court easily can tweak the doctrine to encompass Sokol's conduct.
As for the very important point that Sokol's conduct did not deprive Berkshire of the opportunity to buy Lubrizol, consider the Guth court's statement of the "general rule":
If an officer or director of a corporation, in violation of his duty as such, acquires gain or advantage for himself, the law charges the interest so acquired with a trust for the benefit of the corporation, at its election, while it denies to the betrayer all benefit and profit. The rule, inveterate and uncompromising in its rigidity, does not rest upon the narrow ground of injury or damage to the corporation resulting from a betrayal of confidence, but upon a broader foundation of a wise public policy that, for the purpose of removing all temptation, extinguishes all possibility of profit flowing from a breach of the confidence imposed by the fiduciary relation.
There's no requirement therein that challenged transactions must "deprive Berkshire of the opportunity to purchase Lubrizol stock." Instead, the focus is on the prohibition against using one's position to make secret profits (as I discuss in the earlier post, Sokol's disclosures to Buffett do not constitute a defense to such claims).
So I continue to think the claim is potentially meritorious. Of course, there will be all sorts of hurdles. The first and most important of of which is that plaintiff filed a derivative suit without first making demand on the Berkshire board. Can plaintiff show doing so would have been futile, so that demand would be excused?